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Tear Down this Wall : On the Persistence of Borders in Trade

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  • Nitsch, Volker

    (Technische Universität Darmstadt)

  • Wolf, Nikolaus

    (University of Warwick and CEPR)

Abstract

Why do borders still matter for economic activity? The reunification of Germany in 1990 provides a unique natural experiment for examining the effect of political borders on trade both in the cross-section and over time. With the fall of the Berlin Wall and the rapid formation of a political and economic union, strong and strictly enforced administrative barriers to trade between East Germany and West Germany were eliminated completely within a very short period of time. The evolution of intra-German trade flows after reunification then provides new insights for both the globalization and border effects literatures. Our estimation results show a remarkable persistence in intra-German trade patterns along the former East-West border ; political integration is not rapidly followed by economic integration. Instead, we estimate that it takes at least one generation (between 33 and 40 years or more) to remove the impact of political borders on trade. This finding strongly suggests that border effects are neither statistical artefacts nor mainly driven by administrative or “red tape” barriers to trade, but arise from economic fundamentals.

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Bibliographic Info

Paper provided by University of Warwick, Department of Economics in its series The Warwick Economics Research Paper Series (TWERPS) with number 919.

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Date of creation: 2009
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Handle: RePEc:wrk:warwec:919

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Keywords: integration ; home bias ; globalization JEL Codes: F14 ; F15;

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  1. James E. Anderson & Eric van Wincoop, 2001. "Gravity with Gravitas: A Solution to the Border Puzzle," NBER Working Papers 8079, National Bureau of Economic Research, Inc.
  2. James E. Anderson & Eric van Wincoop, 2004. "Trade Costs," Boston College Working Papers in Economics 593, Boston College Department of Economics.
  3. Nitsch, Volker, 2000. "National Borders and International Trade: Evidence from the European Union," Publications of Darmstadt Technical University, Institute of Economics (VWL) 34476, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute of Economics (VWL).
  4. Nikolaus Wolf, 2008. "Was Germany ever United? Evidence from Intra- and International Trade 1885 - 1933," CESifo Working Paper Series 2424, CESifo Group Munich.
  5. Stephen J. Redding & Daniel M. Sturm, 2008. "The Costs of Remoteness: Evidence from German Division and Reunification," American Economic Review, American Economic Association, vol. 98(5), pages 1766-97, December.
  6. Combes, Pierre-Philippe & Lafourcade, Miren & Mayer, Thierry, 2005. "The trade-creating effects of business and social networks: evidence from France," Journal of International Economics, Elsevier, vol. 66(1), pages 1-29, May.
  7. Chen, Natalie, 2004. "Intra-national versus international trade in the European Union: why do national borders matter?," Journal of International Economics, Elsevier, vol. 63(1), pages 93-118, May.
  8. James E. Rauch, 1996. "Networks versus Markets in International Trade," NBER Working Papers 5617, National Bureau of Economic Research, Inc.
  9. Russell Hillberry & David Hummels, 2005. "Trade Responses to Geographic Frictions: A Decomposition Using Micro-Data," NBER Working Papers 11339, National Bureau of Economic Research, Inc.
  10. J. M. C. Santos Silva & Silvana Tenreyro, 2006. "The Log of Gravity," The Review of Economics and Statistics, MIT Press, vol. 88(4), pages 641-658, November.
  11. Max-Stephan Schulze & Nikolaus Wolf, 2009. "On the origins of border effects: insights from the Habsburg Empire," Journal of Economic Geography, Oxford University Press, vol. 9(1), pages 117-136, January.
  12. McCallum, John, 1995. "National Borders Matter: Canada-U.S. Regional Trade Patterns," American Economic Review, American Economic Association, vol. 85(3), pages 615-23, June.
  13. Thierry Mayer & Keith Head, 2002. "Illusory Border Effects: Distance Mismeasurement Inflates Estimates of Home Bias in Trade," Working Papers 2002-01, CEPII research center.
  14. Hans Christian Heinemeyer, 2007. "The treatment effect of borders on trade. The great war and the disintegration of Central Europe," Cliometrica, Journal of Historical Economics and Econometric History, Association Française de Cliométrie (AFC), vol. 1(3), pages 177-210, October.
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Cited by:
  1. Heinemeyer, Hans Christian & Schulze, Max Stephan & Wolf, Nikolaus, 2008. "Endogenous Borders? Exploring a Natural Experiment on Border Effects," CEPR Discussion Papers 6909, C.E.P.R. Discussion Papers.
  2. Nikolaus Wolf, 2008. "Was Germany ever United? Evidence from Intra- and International Trade 1885 - 1933," CESifo Working Paper Series 2424, CESifo Group Munich.
  3. Gabriel Felbermayr & Jasmin Gröschl, 2011. "Within US Trade and the Long Shadow of the American Secession," Ifo Working Paper Series Ifo Working Paper No. 117, Ifo Institute for Economic Research at the University of Munich.
  4. Carlos Llano-Verduras & Asier Minondo & Francisco Requena-Silvente, 2011. "Is the Border Effect an Artefact of Geographic Aggregation?," Working Papers 1108, Department of Applied Economics II, Universidad de Valencia.
  5. Volker Nitsch & Nikolaus Wolf, 2010. "Zur Dauerhaftigkeit von Handelsbarrieren : Evidenz von der deutsch-deutschen Wiedervereinigung," ifo Dresden berichtet, Ifo Institute for Economic Research at the University of Munich, vol. 17(05), pages 28-30, October.
  6. Hans-Christian Heinemeyer & Max-Stephan Schulze & Nikolaus Wolf, 2008. "Endogenous Borders? The Effects of New Borders on Trade in Central Europe 1885-1933," CESifo Working Paper Series 2246, CESifo Group Munich.

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